Surveillance: 2023 Expectations with Knutzen

now multi asset class CIO at new Berger Berman. Eric, I want to start there because that seems to be one of the consensus is out there that this will be a great year, particularly in government debt. Do you agree what we do? We do and and two thousand twenty three could continue to be pretty challenging for stocks, but we do think that we are at a bit

of a sea change. I've been doing this almost as long as Howard Marks, and I would agree that the next period of time is going to be quite different from the last ten of fifteen years. And one of the key elements there is that rates have to be in our view, structurally higher, associated with higher structural inflation and the FEDS determination and frankly, the capital markets need to have a real um positive real yield across the

government bond curve. The FED is forecasting that rates at the end of this year are gonna be five ish per cent. Growth is going to be half of a percent, inflation is going to be three point two percent. That's a real yield of almost two percent. We haven't seen a real yield like that consistently for over fifteen years. We think you should pay attention to the FED. And this is a dramatic change from the environment we've seen over the last ten of fifteen years. Do we see

a pivot eric? That's not our expectation the FED. We believe that FED and other central banks are going to need to maintain tight financial conditions through two thousand three.

You see it with the Bank of Japan beginning their normalization process even earlier than people expected, and that that then encourages the rest of global financial conditions to to tighten um And now what appears to be an even more rapid and perhaps chaotic and disorderly you know, reopening by China, which could lead to more rapid growth, more robust growth from China sooner rather than later. That just adds to the need for global central banks to keep

financial conditions. I thought about actually buying my hellcat by shorting JGBS, but I can't get a borrow and now with the end strengthening, that would kill me. Is there anything else you want to went about? Uh? No, No, I I just think it's an interesting trade that um now I understand really when I look at the end right now one thirty one why it's called the widow maker in terms of yeah, in terms of what else to expect for three? Um, where do you see earnings?

Because this is uh something that a lot of people have flagged to us, is maybe the most important part, certainly in the equity space. Right we're still expecting two hundred and ten dollars two hundred and twenty dollars a share?

Does that need to come in absolute? Well, So there's a huge difference in opinion between strategists and macro economists who are expecting recession and who are protecting earnings anywhere from eighty to two ten or dollars, and that assumes a recession and that or or even radically slow in growth.

Even if we avoid recession, that's normally accompanied by earnings declines of ten to bottom up consensus Wall Street forecasts are still expecting earnings in two thousand twenty three about two hundred thirty dollars to share up four is per cent. Our view is that earnings have to come down from that two thirty dollar target percent um whether they get

to one eighty were not quite that barage. We think that there are corporate management teams at various levers, especially in a more inflationary environment, to support earnings, but we think they end the year below the current per share that we expect for two two and that's the last leg down, that's the last source of pressure on equities. Is that more on the demand side that that earnings pressure is going to come, or on the input cost side and supply some of both margins have to come

under pressure there. It's like there's still almost at secular highs um that has to normalize to a certain degree. Corporate management teams, particularly in the United States, have gotten very good at managing managing margin margins, but they have to come down somewhat. So it's going to be a mix of both popline pressure as well as pressure on margins.

When do we start to go back to a new normal, right, I mean, at what point we can we reset and understand whether we just can expect a lower turns for the next decade in equity index indices, or perhaps or aversion back to the FED getting to low rates and some sort of pre pandemic norm. Well, we don't believe we're going back to the new normal of the last time of fifteen years with low inflation, low rates, financial repression, etcetera.

We think we're going to a more normalized rate environment with structurally higher inflation, in part because of a fundamental change in the relative power of labor versus capital, which as we're just talking about, in part because of de globalization, in part because of de carbonization, um, in part because of changing demographics and the changing role and relationship of China with major major trade partners and with their domestic policy. UM. So, we don't think we go back to the new normal

any type. So we're really going back to a more or old normal, more typical environment. Doesn't mean there aren't going to be interesting opportunities. We see great opportunities in short duration fixed income to your treasuries at four point three percent yield, they're they're battling with SMP five earnings yield. You haven't seen a comparison like that since two thousand seven.

Short duration treasury, short duration investment grade credit, mortgage backed securities, structured product we think will be very interesting this year. Within the US. We like, we like value stocks, quality stocks, high dividend yielding stocks. Money now as opposed to money in the future. But now you've actually got competition from the ristory rate um for your capital. Eric Newtson doesn't necessarily paint a particularly wonderful picture for returns for equities,

but certainly the short term of the treasury curve. Eric Neutson of new Berger Burman, thank you so much for being with us. We have seen such a rapid pace of tightening four five basis points in the span of nine months. The economy hasn't fully felt the effects of that. So I guess if you are on the team recession,

you're saying, just wait until it hits dies. And that would really bring back the idea of credibility for the Fed, right that they can essentially shoot down inflation, which brings us to our next guest and esteemed member of the Bloomberg executive team, Editor in Chief Emeritus for Bloomberg, Matt Winkler. You wrote, a column that is fascinating where you basically pushed back against all the people who are saying the FED is just behind the curve. They're getting it wrong, saying, actually,

it seems like they're bang on target. Well, thank you, great to be with you. Happy New Year. A year ago at this time, the prevailing narrative, as you say, was the FED was behind the curve. Now, let's just go back and remember that inflation was seven uh, and

that's what prompted the outcry. And we also need to be reminded of the fact that the US was making the most dramatic recovery from the pandemic recession, which was the worst since the global depression eight decades ago, and we were getting close to what is now the three point seven unemployment, right, So the U s economy was actually doing very well, better than any major developed economy in the world. And that's when the FED decided, Okay,

the data is what drives us. We're data dependent. We're now going to tighten credit. And everybody said they were too late, too little, etcetera. And we know that what happened, as you said, an unprecedented tightening, but a tightening that came when the U. S. Economy was much stronger resilient than it otherwise would have been. And I think that's the parenthetical clause that's left out of this, is that the U. S. Economy was much stronger when they Fed tightened.

And so here we are today. Inflation is way below the nine point one peak in June, when everybody said the FED had lost its way. The bond market never gave up on the FED. The bond market was always confident, somehow, some way, this inflation problem is going to be resolved. Well, but the bond market got the FED wrong at the end of right because we looked at a two year yield that was zero point seven percent, we looked at a ten uere yield at one and a half percent,

we saw a massive rise. People underestimated how much the FED would have to do in order to combat inflation, heading into how much credibility do you give the idea that we're in a new higher inflation regime that will cause a real question mark for the FED in terms of how far hard they have to go and how much pain they have to I'm not sure the bond market actually ever lost its way here that you know, we're talking about maybe relative values, but the bond market

was never convinced that run over inflation was here ever, and that appears to be still correct. Okay, what the bond market, if you say, got wrong is it didn't expect the Fed to tighten to the extent that it did to contain inflation. But the bond market always anticipated that inflation would be much lower than many of our strategists and pundits have predicted. And so that's where we

are today. The Fed is still going to keep interest rates elevated, They've already said that, and so the bond market is anticipating that we're still going to see what five six percent inflation six months, but a year from now it's going to be much closer to the two percent target. We talked to Eddie Ardnny yesterday who was saying, um, that you haven't really seen anything break. You've seen implosions here and there in crypto notably, but there hasn't been

any contagion across the entire financial system. And he said, you know, maybe this Fed has gotten it right there, probably closer to a soft landing, and there's a chance that there's no landing at all. Um, do you think that we're starting to see a growing view that we could have a very short and shallow recession or even not have a recession. Okay, so here a couple of things.

A year ago, we were all concerned about supply chain bottlenecks, if you recall, and the ships in the Port of Los Angeles, the largest port, We're backed up as far as the eye could see maybe sixty five ships waiting to unload their cargoes. When we caught up with Jeans Sirocco, who's the executive director of the Port of Los Angeles just a month ago, the whole waterfront was blissfully free

of any supply chain bottlenecks. So there's an example where common prevailing assumptions a year ago turned out to be the worst as far as it went, and now it's gotten better. So it's very similar with the rest of the U. S. Economy, which is everybody you can think of was worried about it. Recession in July and paying double the price for used cars, right, I mean, prices were obviously that's part of inflation, just off the charts, and now we're looking at that and that market used cars.

I've seen it just collapse. Right, We got data out of Spain, for example, today that shows inflation is coming down much faster than expected. Do we get closer to two percent? Are the break evens? Right? You think in a year? Well, look, the bond market is a collection of everybody with the most at stake, if you want to think about it that way. So these are the people who have resources everywhere. They're betting their reputations and

their fortunes, and they're all over the world. And treasuries are the most widely held security anywhere in the world and the most liquid, and that collectively is, as far as I'm concerned, the most uh, if you like evidentiary way of looking at this equation, which is these people are saying, somehow, some way, just as you said, matt Um, the inflation that we've been seeing is not going to be runaway. It's going to decelerate um in the months ahead.

And by the way, the economy still ends two thousand twenty two up, not down. Up. Well. Obviously, two thousand twenty two was a very hard year to predict, and so much has happened, including Elon Musk buying Twitter, which is another curveball that I don't think any of us saw coming back in April. Another one of your great pieces was entitled in defense of Elon Musk's managerial excellence. Having seen now eight months later, what has happened to

Tesla's stock? What has happened inside of Twitter since he took over? How, if at all, does your view change in hindsight? Well, I never understood the Twitter UH debaccle of you want to call it that from the beginning and said so at the time. I think what's missing in the discussion of Tesla right now, which obviously has been the biggest casualty maybe of the tech UH industry,

is that it's still valued more than Toyota. Okay, if you look at and nobody mentions that, if you look at the market capitalization of Tesla today, having lost what its value in, it's still what three hundred and fifty billion dollars in market uh and you know that's worth more than Toyota. So it's worth still after all this carnage. Now, why is that? I would say partly because the automobile itself is way ahead of where the rest of the

auto industry has been. It is, by far in the US the most popular e V still um and you know that's the real what do you at the moment? Even if you add General Motors market cap to Ford's market cap to Toyota's market cap, Tesla is still worth substantially. Yeah, and so okay, maybe that's all a mirage, But given all the carnage that we've all been talking about, I just think it's interesting no one, no one mentions that the market cap of Tesla today, okay, in the twenty

two is still worth more than Toyota. Matt Winkler, Fabulous to have you on with your perspective, Matt Winkler, Editor emeritus of Bloomberg, Editor in chief Emeritus. This has been one of the big questions, not only with respect to China and the economy, but also with respect to COVID. Do we have to care about coronavirus again? People have to start getting tested in more masks. Lawrence Houer, I

was I loved speaking with you. I saw your name pop up and I thought to myself, I really want to speak to you, and I hate that I have to speak to you, because why do we have the reprisal of COVID yet once again, the associate professor at the University of Nebraska Medical Center and Special Pathogens Research Network Director, Lauren, It is great to see you, and it is also terrible to see you because people are starting to get worried about a new variant. How much

are you concerned about this? How much is that tied just sort of the mass infection level that we're seeing in China. Yeah, that's a great question, and I agree. Happy to see you and sad to see you because it means we're back to seeing large numbers of COVID. So I think for me, one of the biggest concerns is less that that a new variants emerging UM and more about the just volume of cases that may be

coming out of China. I mean, we've seen some numbers that look like the early days of COVID when we were we weren't even calling it COVID and we were watching from Afar to see what would happen in China. So I think the numbers of cases are what we're worried about seeing come into Europe, come into the US,

come into the global UM environment. And and if we do see new variants emerge, I think it'll be important to track what they are UM, what what the sub variants are and make sure that we can adjust are our tools, Lauren, Can China be trusted to reliably do that and to count the case this period? I think it's it's not what we're seeing right now for sure. Um we're not seeing the data we would like to see out of China, especially on the deaths, um on,

on the sequencing that they're doing. Um So they've reduced the amount of people that they're even testing. UM So we're not seeing testing data. But we also know that the testing is much lower than it was just a few weeks ago. Um And and so I think the pressure has to be on China to share every single number they have, right so, what what are the case counts that they're aware of, what testing are they doing,

and importantly, what variants are they seeing? Is it only the variants that pose a risk to the rest of the world if we are worried about it's spreading once again, If no new variants emerge, how much of the population is going to be relatively immune or at least not have any form of severe disease because we've already had so many infections and vaccinations as well. Yeah, that's a

great question. I think that that large numbers of COVID are are problematic and dangerous no matter what, because the more COVID cases you have, the more likely you are going to see those um those severe cases and the deaths. So no matter what, we are going to have large numbers of cases coming out of China and impacting the global health environment, the global economy, um and and that can be really dangerous. I think the anytime you have a less immune population, UM, you're going to see the

potential for variance. So even if we're not seeing variants right now, uh, seeing those large numbers come out could impact the likelihood that we see a new variant in the future. Lauren, how does how does the US situation look right now with regards to COVID infection rates, specifically New York City around the Madison Square Garden area, because I'm going there tonight with my closest friends. Not a selfish question at all. Yeah, I would definitely recommend wearing

a mask in Madison Square Garden. I think COVID rates are so high and we're seeing a lot of um I l I or influenza like illness all across the Northeast and and really all across the US, So it is a risky time to be in close quarters with people. Um and and we're seeing a lot of illness still so UM, I think there's a lot of people who are worried about an ongoing COVID surge and um and it's coupled with a respiratory virus season like we have not seen in several years. So it's not the safest

time to be out in public. Uh, certainly without a mask. But but you know, just in those close quarters. Is it ever going to go away? Lauren? I mean, it's been almost three years, right, um, and now we're adding all of these other You've got the respiratory infection. People are worried about fluid pneumonia again, I've had I think six shots since March of Are we ever going to get over this? I don't think COVID is ever going

to go away. We're not going to get to zero COVID and and and I think that's also part of what we're seeing in China right now. Um. One of the one of the things that we're hoping to see is that we get on a cadence similar to flu where UM, where we're getting vaccinated on a regular schedule, we're minimizing the impact of the disease on our life um, and we're reducing spread wherever possible. So I think we're still in this sort of Perry emergency phase where we're

just figuring out how to live with covid um. It's still certainly quite dangerous. But as we get on that you know, routine vaccination schedule, as we get more and more data on how and when we need to vaccinate people, and as we come back to sort of believing in the science of vaccines and and all of the other tools we've built in a in a very short amount of time um that hopefully we will be able to live with it in a much less painful way. I

hope it's not a strategy. And that's this is the reason why I say that, is because we're talking about masking. We're talking about how you should probably be careful congregating with your closest friends, and yet I can pretty much guarantee that Matt Miller will still be at that concert. You will not be wearing a mask, and neither will

anybody else in there. I'm just going to suggest that if you take a look at a lot of airplanes, and you look at that very few people are masked, and those that are are given glances of what's wrong with you? Do you have the flu? Or? I mean, because we all want to get back to normal. So how do you change a culture that is absolutely opposed to masking and using some of the tools that you're

talking about. Yeah, I completely agree with you. I think that it has become very divisive to even talk about, let alone use some of these important public health strategies. I think we have to go back to the roots of explaining what where the science comes from, why we use masks when we use them, and and maybe the culture won't change, And unfortunately that that is something we may have to deal with. But I think that it

is it is, it is. It remains an option for people UM, and it certainly remains the recommendation UM, at least from me. And I think it's important to keep making that recommendation, sort of normalizing that this is a choice that is saying for people to make and is not a political statement. It is a statement where you're saying, I need to protect my health or I want to help protect the health of others, and I'm going to

choose to do that. And so the more we can normalize that, the easier it gets to make that decision. I mean, I know, masks are not you know, they're not the place people want to be right now. And that's completely reasonable to to feel that way, UM, And many people are making that choice. UM. But but it certainly shouldn't be that the people who do make the choice to mask are judged or are looked upon as

as making a poor choice. Lauren, just real quick here and to finish up, what is the chance in your view of our being subjected to a pandemic like the one that we just went through with another mutation of the COVID of virus. I think our chance of going through another pandemic is quite high. I'm not necessarily sure that it is it will be with a COVID mutation or you know, a co variant of concern um, but certainly we could see a pandemic with another virus or

with a mutation of this same virus in our lives. Um. The risk associated with these new viruses coming into our population just continues to grow. And so if we don't implement the tools UM that we've developed during COVID and also some of the lessons learned. Making sure that there are lessons learned and not just lessons identified. Um, we will continue to be at risk for another pandemic. Lawrence Our, thank you, I guess, but also not thank you. I

love talking with you. I love the insight that you bring. I hope that I hope that the worst case scenario does not come to pass. I'm sure we all do. Lawrence Our of the University of Nebraska Medical Center, thank you so much. It's the difference of year makes right. Because last holiday season we were talking about goods that were stuck on ships and on trucks and the supply chain that was a total mess. Therefore, there were such a limited quantity of going people were willing to pay

up for them. Now it's entirely different. There's too much stuff that people frankly aren't trying to buy anymore, so they're less price tolerant. Let's get a take on this data. Telsa founder, CEO and chief Research officer at Telsey Advisory Group, and this is the exact dynamic that has led to an inventory glatt in retails retailers like Target. That meant Matt mentioned, do we have a sense of the progress they are making and doing that discounting and working that

inventory down. Hi, how are you thank you for having me? I think overall what surprised people coming out of the third quarter is that the retailers did make progress in lowering their inventory. There should be more progress made by the end of the fourth quarter, and as retailers report their preliminary holiday sales results, many of them the end of next week the beginning of the following watch for

those inventory numbers. I think they did make progress. I think some of these markedowns and discounts that they have even buy one get one off for some definitely helped

to pave the way. But it will still be at least through the first quarter because don't forget, you need wholesale accounts to order, and wholesale accounts like the department stores are ordering very carefully down around ten to fift from what I hear for the spring selling season, with the goal for both the brands and the retailers to

get back and focus to promote less, promote less. So you're saying that that doesn't need to continue, even if we are looking next year at an economy that if it doesn't fall into an out raper session could soften because in theory, that also brings down consumers spending power. Keep in mind a couple of things when you think about the bifurcation of the consumer. The middle to high end still has dollars. They have dollars to spend its

product innovation that drives demand. They'll be looking for bargains, and the benefit is going to be the trade down to the off pricers, the lower to middle income consumer. You're gonna see the targets and the walmarts move through inventory and the focus on essentials will be even more for those consumers. So I think we should have not the same cadence of promotions, but the value offering will

be even more dynamic than it was this year. They'll be able to get goods at more compelling prices because you're not going to have hopefully higher gas prices like what you had last year. Well, and the question also is whether how much people have shifted some of the supply chains away from China during this time, or whether the reopening of China will actually allow a lot of

these retailers to buy goods at lower, more compelling pricing. Tana, how much have you seen a real rejiggering of where some of the clothing, where some of the items are being manufactured. Over the past three years, we've seen a lot of rejiggering, and I think the ability to diverse fight from China has been in place for a long time. I think the change for twenty three is going to be the cost of ocean freight rates, the cost of air freighting, and frankly not even air freighting as much

goods in as they had in the past. What's gonna be sticky is higher labor us that is not going away. What is going to moderate is going to be those supply chain costs that should get retailers more flexibility. Promotions will be higher than they were in twenty one, they'll be higher than they were in the first half of twenty two, but hopefully we're not going back to two

thou nineteen levels. It's interesting, you know, I was in Detroit a couple of months ago talking with Mark Royce, and obviously automotive is a little bit different than the retail that you're covering, but he was saying, look, we're not going to go back to the days of big discounts. We're not going to go back to the days of

pack dealer lots. We're gonna keep selling these products at M S r P. And he has to be confident that um CEOs of other carmakers are going to act the same way, right UM can can retailers try and follow that same strategy or will they undercut each other? I think overall, when there is as much inventory glad as we've had, I think they're all being aggressive. You've seen after the holiday season what Target did with their

clearance event. I think when Amazon had their second Prime Day in October, that basically opened this spigot for Target, Walmart, and Old Navy to discount aggressively. I think getting the inventor is more normalized. You're not going to no promotions, but you're not going to have the burst of promotions with seventy and eighty percent off that we saw in some instances this year. Dana Uh, we were talking yesterday

a little bit pickleball. The rackets made in China are so much cheaper than the rackets made in the US, and today somebody on my Twitter feed mentioned snap on tools. They're also incredibly expensive made in the US compared to the husky tools you see at home deep home made in China. Is deglobalization really going to happen because the price differences are really pretty massive, and so I wonder, you know, if we go down that road, is it inflationary?

You're absolutely right. I mean, what we've seen is we've seen the ability to produce goods in China and frankly, the quality of the speed that it takes in the cost is lower. We've seeing a focus on diversification, whether to South America, whether to Africa, whether whether to America. But managing prices key, whether it's raw materials, labor costs, or shipping. I think China will always remain relevant. I think the percentage coming from China will continue to be

reduced Data Telsea. Thank you so much for being with us. Dana Telsey of Telsey Advisory Group. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations.

And subscribe to the Surveillance Podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal, I'm Tom keene In. This is Bloomberg.